Will non-banks be bound by debt-to-income rules?

Proposed changes should strengthen housing market - Basecorp Finance

Will non-banks be bound by debt-to-income rules?

Proposed debt-to-income restrictions will have limited impact on business at Basecorp Finance, its chief financial officer says.

More widely, the Financial Services Federation is confident that the proposed restrictions apply only to mainstream banks.

Debt-to-income ratios (DTIs) have been on the radar since 2021, when the Reserve Bank said that debt serviceability restrictions such as a DTI limit were likely to be the most effective additional tool to support financial stability and sustainable house prices.

Finance Minister Grant Robertson agreed “in principle” to allow the Reserve Bank to implement DTIs, on the condition that their implementation would have limited impact on first home buyers.

The Reserve Bank is now consulting on proposed DTI limits in conjunction with a loosening of LVR rules. A Reserve Bank of New Zealand spokesperson confirmed to NZ Adviser that the proposed DTI restrictions only apply to bank lending, specifically mortgage lending.

DTIs have ‘limited impact’ on business - Basecorp Finance

Basecorp Finance chief financial officer John Moody (pictured above left) said that as with other non-banks that issue to capital markets, Basecorp Finance currently calculates and reports on DTI levels to rating agencies as part of its issuance programme.

“We see the proposed DTI restrictions as having a limited impact on business at Basecorp, even if interest rates fall,” Moody said.

Given that serviceability risks are already captured by test rates used across the bank and non-bank sector, Moody said that there was a rationale that DTIs are unnecessary. 

However, the proposed consultation figures (a 20% cap on bank mortgages issued to owner occupiers wanting to borrow over six times’ their gross annual income, seven times’ income for investors) seem “reasonable” and provide “some headroom” as interest rates reduce down the track, he said.

Restrictions won’t apply to non-banks - FSF

Financial Services Federation (FSF) executive director Lyn McMorran (pictured above right) said that based on the Reserve Bank consultation paper, the industry body representing the non-bank sector is “quite certain” that the proposed restrictions won’t apply to anyone other than traditional banks.

“This means that FSF’s members that are non-bank deposit takers (NBDT’s) and non-bank housing lenders will not be affected, and therefore will continue to be able to offer valuable, competitive offerings when compared to the banks,” McMorran said.

Proposed changes likely to support property market

Moody acknowledged that the sector had been expecting the implementation of DTIs and said that the proposed DTI restrictions mirror those in-place offshore. On balance, the restrictions are useful and have been positively received by the mortgage and finance sector, he said.

“When combined with adjustments to LVR restrictions, we think they should provide further buoyancy to the housing market,” Moody said.

Feedback from mortgage advisers included a need for clarity on how ‘income’ is defined, and to consider small business owners leveraging residential lending for capital needs.

Moody acknowledged that there was “plenty of work to do on the detail” and noted that the consultation period, which ends on March 12, would provide an opportunity for banks and the wider finance sector to respond.

Non-bank members ‘committed’ to responsible lending - FSF

McMorran said that FSF members were “committed to responsible lending”, ensuring that even without being subject to the proposed DTI restrictions, their borrowers would not be placed into situations of hardship.

“It simply comes down to ensuring the loan is affordable, rather than the level of DTI or LVR,” she said.

Proposed loosening of LVRs ‘positive’ for investors

The RBNZ is also proposing to increase the speed limits on low deposit lending to owner-occupiers and investors.

The cap on loans to borrowers with less than 20% deposit (over 80% LVR) would increase to 20% of a bank’s total new owner-occupier lending (up from 15%).  For investors, it would increase the high-LVR threshold to 70%, allowing 5% of a bank’s new investor lending to be to borrowers with deposits of less than 30% (over 70% LVR).

Moody said that Basecorp Finance had always capped loan-to-value ratios (LVRs) at 80%, confirming there would be no change to its approach to owner-occupier lending. The non-bank lender expects the proposed LVR changes to be positive for the investor segment, which he said was showing positive signs of momentum.

“We expect to see Basecorp benefit from this change and mirror these new LVR caps in our lending policy,” Moody said.

When combined with DTI restrictions, on balance, the changes should be “net-positive” for the non-bank sector, he said.

“We think the main drag on origination volumes for non-banks, being higher interest rates, will remain and we continue to see the RBNZ pushing back against market expectations of a 2024 cut,” Moody said.

Basecorp Finance writes both CCCFA-regulated and non-CCCFA regulated loans across short and long terms. 

What are your thoughts on the Reserve Bank’s proposed DTI restrictions and LVRs?  Share your thoughts in the comments section below.